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What FATCA Means to You and Your Investments

You may have recently received a letter from your financial institution or investment firm asking for some of your personal details.  Typically the letter requests many personal, tax and residency details, such as your country of birth, the country in which you live, tax identification numbers, and whether you pay taxes in any other country, etc.  If you have not yet received such a letter, it may be coming to you soon.

The reason for the letter is that your country and the US probably signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA), which will allow automatic exchange of tax information between the two countries this year. FATCA is an important part of the US government’s effort to address tax evasion. FATCA is rapidly becoming the global standard in the effort to curtail offshore tax evasion.

FATCA REQUIREMENTS

Put simply, under FATCA, financial institutions will have to report accounts maintained by US tax payers. FATCA-compliant financial institutions in many countries are required to disclose details of their clients’ income, and if they are either residents of the US or financially connected to the US or have any tax residency in US. “US persons” very broadly includes US citizens, green card holders, customers with US addresses or phone numbers, customers with regular payments made to US payees, etc.

Under FATCA, financial institutions, including banks, deposit taking non-banking finance companies, mutual funds, private equity funds, custodians and life insurance companies, will have to maintain information about their customers, including name, address, tax identification number and in cases of individuals, even details such as place and date of birth.

TO PREVENT TAX EVASION

The US requires its taxpayers to disclose all global income. Under FATCA, the US government mandates foreign financial institutions to get customers’ personal, tax and residency details in order to identify US persons. To that effect, the US has signed Inter Government Agreements (IGA) with more than 90 countries making it mandatory for these countries’ financial institutions, such as banks, insurance companies and mutual funds, to furnish details of clients or investors who are connected to the US. If the foreign financial institutions refuse to cooperate, FATCA allows the US government to deduct a punitive 30% withholding tax from any payments due to the non-cooperating foreign financial institutions.

INFORMATION COLLECTION

According to the FATCA guidelines, this information needs to be collected only from those investors who have opened “accounts” on or after 1 July 2014 or if they have an account as on 30 June 2014 wherein the value of investments is above $50,000. “Accounts” means any customer holding with a balance or account number (i.e., mutual fund folio, investment account, etc.).

Some financial institutions have already started reaching out to customers directly. Some have started contacting branches, bankers, advisors, and/or intermediate distributors who have been tasked to solicit and provide the customer information. Therefore, your trusted advisors may come and ask you, or simply disclose your name directly (without notice to you) if they have already enough proof that a known connection to the US.

If you get a FATCA letter, you should immediately speak with a competent tax attorney to ascertain your US tax compliance. Several voluntary disclosure solutions are available to noncompliant persons in order to clean up any instances of delinquent or failure to file tax returns.

Most importantly, noncompliant persons must cleanup their mess before the government find them, after which it is too late.